Assessment Based on Net Worth

The Canada Revenue Agency sometimes uses a basis of accounting known as net worth to assess, calculate and issue assessments against certain taxpayers.

The net worth basis of accounting consists of determining the amounts a taxpayer would have omitted to report, by proceeding with an analysis of his assets, year after year.

So if a taxpayer buys in a given year a $100,000 condo as well as a $50,000 car without taking out a loan, it can be assumed that he has earned at least $150,000 during that year.  Now, if such taxpayer reported net income of only 30,000$ for that year, there would be a difference of $120,000 ($100,000 + $50,000 ‑ $30,000 = $120,000). The agency will most certainly assess tax against such taxpayer for the $120,000 of unreported income. To this amount, the agency will add tax penalties that are often equivalent to 50% of the avoided tax amount.

In such situation, where the assessment is performed by the taxation authorities, a taxpayer will have the burden of demonstrating that such net worth assessment performed by the Canada Revenue Agency is untrue or erroneous.

For example, a taxpayer may have received during such year an inheritance, a gift from a relative or the payment of a loan he had made to another person. All of these reasons may validly explain and justify the difference presumed by the taxation authorities and hence reduce to $0 the assessments based on net worth.

It is also important to note that an assessment based on net worth is essentially speculative and arbitrary and, for this reason, the taxpayer can contradict at leisure the assessment performed by the taxation authorities by providing credible and sound explanations.

One needs to bear in mind that our taxation authorities are not allowed to use such basis of accounting in all circumstances. The net worth basis of accounting can only be used in the cases where a taxpayer under audit has no accounting records or categorically refuses to provide them.

Our law firm offers leading-edge expertise to taxpayers who have to deal with assessments based on net worth. Previously a lawyer at Revenu Québec, Louis Sirois, lawyer, frequently assists taxpayers to contest assessments based on net worth.

As such assessments are fundamentally arbitrary and approximative, it is always possible for a taxpayer to contest them successfully.

 

Louis Sirois, tax lawyer